Solana Summer continues on AAX, and we are introducing you to another exciting project.
Meet Project Serum, a Solana-based decentralized exchange (DEX) that combines the advantages of DeFi with the technology of centralized exchanges to provide an efficient, low-cost, and fast trading platform for cryptocurrencies.
In this article, you will learn what Serum is, why it is unique, and how it works, along with all the essential information about the project’s native SRM token.
Let’s get started!
What Is Serum?
Built on top of Solana, Serum is an on-chain DEX that facilitates cheap and lightning-fast trades between users while offering a similar level of convenience and functionality as centralized trading platforms.
Launched in August 2020, Serum was founded by the Sam Bankman-Fried-led crypto derivatives exchange FTX and Alameda Research, a quantitative digital asset trading firm and liquidity provider.
In terms of financials, Serum hosted two initial exchange offerings (IEOs) on FTX and BitMax last August, in which the project raised a total of $660,000. Prior to the public sale, the DEX protocol acquired roughly $20 million throughout seed rounds.
If you take a look at Serum, it’s definitely not an overly complex service, especially if we compare it to other decentralized finance (DeFi) solutions. Its primary purpose is to connect traders and their orders for different cryptocurrency pairs.
However, simplicity is sometimes a great benefit, especially in the DeFi space.
What makes Serum unique is how it utilizes central on-chain orders books for its DEX solution to make trading much more efficient and user-friendly than on Automated Market Maker (AMM) protocols like Uniswap or PancakeSwap.
According to the project, Serum seeks to solve some of the shortcomings and inefficiencies of DeFi. While decentralized finance applications have created tremendous value, one of their most burning issues is excessive transaction fees and relatively long processing times.
As you may know, transactions fees are much higher for DeFi decentralized applications (dApps) than for simple wallet-to-wallet transfers due to the increased gas usage. Ethereum, the leading smart contract platform and DeFi hub, has long been struggling with limited scalability, which led to surging gas fees due to the increased activity within the network.
According to Etherscan, the average cost of an atomic swap on Uniswap is around $7 (as of July 8), which is currently a very low rate. When the network gets congested, doing the same often features gas costs as high as $150, making it a tough choice for small-value trades. At the same time, it usually takes a few minutes to swap two tokens on Ethereum-based DeFi platforms.
While it’s still viable for many to trade with coins with the above conditions, it’s definitely not an ideal option, especially if we compare Ethereum-based AMMs with the speed and cost-efficient order execution of a centralized exchange like AAX.
Furthermore, Serum argues that DeFi protocols also struggle with the increased centralization of price oracles and stablecoin reserves. Also, AMMs lack the convenience and advanced trading features (e.g., limit orders) of centralized exchanges.
Serum seeks to solve all the above issues in two ways, first, by building on Solana to achieve super fast (it only takes 0.4 seconds to produce a block) and cheap (the average fee is currently $0.00025) transactions. And, second, by leveraging on-chain central order books to facilitate efficient trades as well as offer a much better user experience and customizability than on AMMs.
And it seems Serum has achieved quite some success with its DEX protocol. In addition to becoming the second most-used DeFi platform on Solana (based on TVL), a whole ecosystem has been built on top of the project.
How Does Serum Work?
In the last section, we have introduced you to Serum’s basics. Now, it’s time to take a look at the core components and mechanisms that power the protocol.
On-Chain Central Order Books
Earlier, we mentioned that the primary method to match orders on DeFi DEXs is by utilizing AMM protocols.
It’s safe to consider AMM a next-generation technology as it solves the liquidity issue decentralized exchanges have long been struggling with.
By leveraging smart contracts in combination with the user-supplied liquidity for a token pair in a pool, AMMs can facilitate decentralized swaps between buyers and sellers without the need for third parties or the service to hold customers’ funds.
However, by eliminating central order books, AMMs lack most of the features, user experience, and efficiency of centralized exchanges.
Simply put, an order book is a list with the open buy and sell orders (including the amounts and prices) for cryptocurrency trading pairs. Combined with a matching engine, order books are currently the fastest, cheapest, and most convenient ways to execute trades between buyers and sellers. For example, the LSEG-powered crypto exchange AAX utilizes central order books to achieve lightning-fast and cost-efficient trading on its platform.
However, using an order book-based matching in its traditional form leads to increased centralization on the platform.
Interestingly, Serum has found a way to solve the efficiency-related issues of DEXs while avoiding the centralization of order book-based trade matching. Instead of utilizing the traditional, centrally controlled way to manage them, Serum’s order books are decentralized and based on top of the Solana blockchain.
As a result, Serum’s order books are fully programmatic, provide increased transparency via the distributed ledger, and have the capability to automatically match orders between third-party users.
According to the project, on-chain order books are among the most computationally-intensive products in the DeFi space. And probably this is the reason why no one has built such on top of a blockchain like Ethereum that features limited scalability and throughput.
However, since Solana can process up to 65,000 transactions per second (TPS) with 0.4 seconds block times, it can handle Serum’s resource-demanding order books seamlessly and without congesting the network. Although, it’s important to mention that the project’s developers had to make a great number of optimizations to the protocol’s matching engine to achieve speedy and low-cost trades.
In addition to more efficient order matching, Serum also offers enhanced functionalities and a more convenient user interface for traders. Unlike on AMMs, you can see and interact with a price chart for every token pair, as well as access limit orders and other features (e.g., POST and IOC orders, trade history, recent trades) on the Solana-based DEX.
However, while Serum’s trading platform is definitely more advanced than other DEXs’ within the DeFi industry, it still lacks some of the features offered by centralized exchanges, such as stop-loss orders as well as margin and derivatives trading.
Although, Serum is working on expanding its platform with more features like borrowing and lending as well as crypto derivatives contracts in the near future.
Furthermore, due to Serum’s composability, many projects on Solana have leveraged the DEX’s platform and order books to build their solutions on top of the protocol.
As a result, you can access more advanced trading features on Bonfida, online and offline mapping services on Maps.me, a DeFi prime brokerage on Oxygen, and a central order book-powered AMM on Raydium. All these services are either built entirely on top of Serum or utilize some of the protocol’s components (e.g., matching engine).
It’s interesting to see that Serum supports trading for Bitcoin and Ethereum on its DEX in addition to coins utilizing Solana’s SPL token standard. In fact, both BTC and ETH are available as wrapped tokens in the form of SPL coins on the platform.
Although, while Serum originally had plans to create cross-chain bridges between the Ethereum and Bitcoin blockchains, it’s not clear whether the project developed its own methods or utilized external services to support trading for ETH and BTC on its DEX.
What we know is that Serum initially utilized wrapped tokens issued by FTX, based on a Medium article published in October 2020. If that’s the case, the protocol has to rely on centralized custodians for cross-chain transfers, which increases the risks of a single point of failure.
One alternative option for Serum is to integrate Wormhole, a decentralized, trustless cross-chain bridge connecting Solana with Ethereum and Terra. And, according to Wormhole’s creators, Solana will eventually replace FTX’s centralized custodians for wrapped assets with the project’s decentralized bridge, which is currently available in beta.
Based on this information, it’s safe to assume that Serum has plans to incorporate Wormhole into its ecosystem to achieve cross-chain functionality in the future instead of developing its own bridge.
Staking and Nodes
Earlier on, we discussed that Serum has made quite some optimizations to its central order books to improve their efficiency and avoid overloading the Solana blockchain.
And this is where staking comes into the picture.
Nodes in the Serum ecosystem can stake the project’s native SRM token with the goal of “turning the crank.” This means that nodes operate hardware devices that fit the validator requirements of Solana while locking up their coins for a certain period and performing tasks related to the optimization of the protocol’s central order book and matching engine.
According to the project, an example scenario is when someone needs to clear out the buffer by triggering a program to progress the matching engine’s state. In such a case, nodes race against each other to perform this task.
Other (current and future) tasks of nodes (may) include:
- Submitting blockchain histories and challenges for cross-chain swaps
- Managing Serum’s insurance fund
- Participating in the protocol’s on-chain governance
As a side note, while Serum mentions its plans to implement on-chain governance on its website and official documents, it seems that this feature is still under development.
According to the project’s plans, Serum will feature a limited on-chain governance model in which nodes can decide on fee changes and resolve cases when they have to handle submissions (e.g., when there is a dispute related to a cross-chain transfer).
Nodes can propose changes on the above matters by deducting 50,000 SRM from their staked tokens. If the node’s proposal gets approved (the protocol needs 60% of the SRM dedicated to voting for a successful proposal) by the community, the protocol will return the validator’s 50,000 SRM. In the opposite case, Serum will burn the collateral.
Users can choose to run their own nodes or delegate coins by staking their SRM towards someone else’s node. Serum provides two options for staking due to the high capital requirements to operate nodes, which is currently 10 million SRM. Out of the 10 million SRM, each node must have at least 1 MSRM (called MegaSerum, which equals 1 million SRM).
In exchange for supporting the ecosystem, Serum compensates stakers in yields on their locked up coins (with a 2% base annual percentage yield and an extra 0-13% APY based on performance). The protocol dedicates 10% of the platform’s trading fees to distribute the nodes’ staking rewards.
EcoSerum is a special node within the protocol’s network dedicated to growing Serum’s ecosystem by offering grants to promising projects building on top of the DEX.
The decentralized exchange protocol funds EcoSerum grants by using 2% of the platform’s trading fees for this purpose.
Participants of the EcoSerum node can vote on the projects to support, engage with team members, provide feedback, and test applications.
Initially, the project launched the Serum Swap service, which is basically an AMM-like solution that aimed to facilitate non-custodial and decentralized token swaps between users.
However, due to the high maintenance requirement of the service as well as the better functionality of alternative AMMs on Solana, Serum decided to shut its swap platform down.
Instead, Serum aims to put more focus on its core DEX product, which remained unaffected by the new changes. At the same time, Serum takes an ecosystem-focused approach, in which it encourages other Solana-based projects to build on top of its protocol.
An excellent example is Raydium, a Solana-powered AMM that utilizes Serum’s central order books to facilitate low-cost, rapid, and convenient token swaps between users.
What Is SRM and What Should I Know About its Price?
SRM is the native token of the Serum protocol. While it’s based on Solana’s SPL standard, it also available as an ERC-20 token on the Ethereum blockchain.
SRM is designed to serve the following purposes:
- Get fee discounts for trades on Serum’s DEX by holding SRM
- Stake SRM to support the ecosystem and receive rewards
- Participate in on-chain governance (when it gets implemented)
SRM has a total supply of 10 billion coins, from which 90% is currently locked and gradually gets released by January 2027. The locked portion of the coin’s supply consists of tokens distributed to seed sale participants and contributors of other fundraising rounds, Serum’s team and advisors, as well as partner and ecosystem incentive funds.
For that reason, only 1 million SRM is unlocked, from which 50 million coins are currently circulating on the market.
Interestingly, the project features two native tokens. In addition to SRM, users can hold MSRM, which refers to MegaSerum and equals 1 million SRM.
MSRM’s primary utility is to operate nodes (as every node needs at least 1 MSRM to generate rewards). At the same time, holding MSRM allows holders to get more fee discounts on the Serum DEX. While users can easily convert 1 million SRM to 1 MSRM and vice versa, MegaSerum has a supply cap of 1,000 coins, which means that a maximum of 10% of all SRM can be locked into MSRM at any point in time.
In addition to featuring a fixed supply, the project uses 68% of the platform’s fees to buy back and burn SRM. As a side note, the remaining 32% goes to stakers (10%), EcoSerum (2%), and the project or graphical user interface (GUI) hosting the (trading) activity (20%).
Furthermore, as soon as the project’s on-chain governance mechanism gets implemented, the protocol will burn the collateral (50,000 SRM) locked in each proposal that has been rejected by the community.
Now that you know the essentials about SRM let’s take a look at the cryptocurrency’s price.
As most digital assets on the market (apart from some short-term movements), SRM hasn’t experienced major value changes until 2021.
After ending 2020 with a minor decrease (-17%) compared to its initial price of $1.245 (August 11, 2020), SRM entered into a bull run, in which the token’s value surged from January 1’s $1.074 to as high as $12.3 by May 3, 2021.
However, SRM was also impacted negatively by the crypto market crash later in the month, which drove down the digital asset’s price to $3.34 as of July 8. That said, Serum’s native cryptocurrency still recorded 211% year-to-date (YTD) gains in 2021.
Serum: an Efficient Solana-Based DEX Powered by Central Order Books
By combining the benefits of DeFi services and central on-chain order books, Serum designed a DEX that offers fast, cheap, and efficient trades to users while remaining decentralized.
Furthermore, while it still lacks some features of centralized exchanges, Serum offers a much better user experience than traditional AMMs found in the decentralized finance space.
In addition to the above benefits, Serum’s grants have attracted numerous Solana-based projects to build on top of the decentralized exchange protocol, which now features a rapidly expanding ecosystem.
And, as the project has great potential, we are looking forward to seeing what’s next for Serum after Solana gains some traction in the crypto space.